Feds’ plan to boost biofuel targets draws fire from all sides

WASHINGTON — The Obama administration is proposing to boost the amount of biofuel that refiners must blend in gasoline this year and next but with planned quotas that fall short of ambitious targets dictated by federal law.

The result is that the Environmental Protection Agency plan unveiled Friday angered most major stakeholders, including refiners who say they’re being forced to use more ethanol than can realistically be consumed and biofuel boosters who say the oil industry is stifling their growth.

Top EPA official Janet McCabe repeatedly stressed to reporters Friday that the proposal is “ambitious, but responsible,” reflecting two competing realities: Lawmakers’ desire in an eight-year-old law to boost biofuel use in the United States and market constraints limiting how much can be consumed domestically today.

The proposed quotas will drive more biofuel use domestically even as the EPA uses its powers “to do it in a responsible way,” said McCabe, acting assistant administrator for EPA’s Office of Air and Radiation. “We’re balancing two dynamics: Congress’ clear intent to increase renewable fuels over time to address climate change and increase energy security, and the real-world circumstances that have slowed progress toward these goals.”

The EPA’s proposal — released on Friday ahead of a June 1 court-ordered deadline — would require refiners to use some 17.4 billion gallons of renewable fuels next year, with about 14 billion gallons of that coming from traditional corn-based ethanol and 3.4 billion gallons slated to come from advanced biofuels derived from non-edible plant material. That is below the levels outlined in a 2007 law, which set a 22.25 billion gallon total renewable fuel target for 2016.

The agency also proposed a 16.3 billion gallon quota for the current year — down from the law’s 20.5 billion gallon target — and a 15.93 billion gallon mandate for 2014 that it says reflects the actual volumes used.

Though the proposed quotas are lower than the levels Congress mandated in 2007, EPA’s targets would still be an increase in the amount of biofuels used and required by the agency in recent years.

The EPA is using its congressionally provided authority to waive the statutorily mandated volumes, allowed if there is an inadequate domestic supply of renewable fuel or if implementing the law’s requirements would “severely harm the economy or environment.”

‘Rosy assumptions’

American Petroleum Institute President Jack Gerard suggested the EPA’s numbers were still too high.

“There’s not been near enough attention paid to the reality of the marketplace,” he said. “Some of their rosy assumptions raise questions of how much more ethanol can be consumed, while at the same time putting consumers at serious risk based on the cars they drive and equipment they use.”

“Their underlying assumptions . . . are inconsistent with what the marketplace is doing,” he added.

Refiners argue they are hitting a blend wall where they can no longer incorporate enough ethanol to meet the law’s volumetric targets without exceeding a 10 percent threshold acceptable for use in all cars and trucks.

Even if oil industry representatives weren’t celebrating enthusiastically on Friday, they netted one big win because EPA appeared to accept the sector’s blend wall arguments in deciding to depart from the law’s ambitious targets.

Most gasoline consumed in the United States is E10, containing 10 percent of the ethanol that can be made from a variety of materials and provides essential octane for fuel. Higher ethanol blends — such as E15 and E85 — have been gradually gaining ground nationwide but they are not widely available.

The oil industry has argued that the EPA should cap biofuel mandates at 9.7 percent, allowing room for some sales of ethanol-free gasoline. But for 2016 at least, the EPA seems to be “driving the implied blend above the 9.7 percent to 10 percent blend wall — to between 10.1 and 10.6 percent,” noted FBR Capital Markets analyst Benjamin Salisbury.

That means “the RFS will once again become a ‘binding mandate,’ and as a consequence, increased volumes of higher blends such as E15 or E85 will need to be priced into the system,” he said.

‘Saturation point

Chet Thompson, president of the American Fuel and Petrochemical Manufactuers, said the EPA’s proposal is “overly ambitious” and ignores that “the use of ethanol in motor fuels has reached a saturation point.”

“Although EPA took appropriate actions and recognized the blend wall, it proposed a standard that falls far short of mitigating the potential harm to consumers,” Thompson said.

But biofuel producers countered that the EPA’s proposal was effectively rewarding the oil industry — including refiners and filling stations — for not embracing the higher blends and investing in infrastructure to make them more available.

Bob Dinneen, president of the Renewable Fuels Association, said the EPA’s proposal “has eviscerated the program’s ability to incentivize investments in infrastructure that would break through the blend wall and encourage the commercialization of new technologies.”

“By adopting the oil company narrative regarding the ability of the market to effectively distribute increasing volumes of renewable fuels . . . the agency has created its own slower, more costly and ultimately diminished track for renewable fuels in this country,” he added.

“We view this as a positive to the (refining) sector as a whole,” said Wells Fargo senior analyst Roger Read in a flash note to clients. It’s even “better news for those with limited in-house ethanol blending capacity.”

The EPA is aiming to finalize the 2014, 2015 and 2016 renewable fuel targets (and a proposed 2017 quota for biodiesel) by Nov. 30. The public will be able to comment in writing through July 27 and at a public hearing planned for June 25 in Kansas City, Kansas.

Lawsuits on horizon

The agency can still make many changes over the next six months, noted Kevin Book, managing director of ClearView Energy Partners. The one certainty from Friday’s announcement may be future litigation.

“Should EPA finalize levels in line with (the) proposal, we believe biofuel advocates could challenge the reduced volumes, regardless of the methodology or waiver authorities the agency cited,” Book told clients in a research note. “Similarly, we expect obligated parties — mostly refiners — to challenge any volumes that breach the blend wall.”

Stephen Brown, vice president of federal government affairs for Tesoro Corp., suggested the proposal invites lawsuits and renewed efforts on Capitol Hill to overhaul the renewable fuel law.

“If the goal of the administration was to set the stage for protracted and complex litigation over the rule when finalized later this year, today’s proposal is a giant step toward that objective.” Brown said. “One has to wonder whether the proposed 2016 volumes are anything more than an invitation by EPA to Congress to intervene via reform legislation.”

Valero Energy Corp., the San Antonio-based refiner that is one of the nation’s leading renewable fuel makers, also said legislation is needed to overhaul the 2007 law.

“If there’s going to be a mandate, the mandate needs to be realistic and achievable, and based on actual fuel usage,” said Bill Day, vice president of communications for Valero. “The targets shouldn’t be based on ambitions, and the mandate shouldn’t pick winners and losers among industries.”